Home loan options abound, despite lack of info about availability

Kenneth R. Harney

Could gloomy popular assumptions about how tough it is to get approved for a mortgage be scaring away large numbers of qualified people?

Could the same worries — I can't come up with the big down payment I need, my credit scores are too low, my bank account has almost none of the "reserves" lenders want to see — put a needless damper on a housing recovery in the new year?

You bet. Lenders and economists will tell you flat out: The lack of accurate information about the availability of loan programs designed to address special needs is discouraging far too many consumers from even considering an application, much less shopping around.

Mortgage banker Alex Stenback of the Residential Mortgage Group in Minnetonka, Minn., says he sees it every day: "People just aren't aware of what's possible right now," and as a result they are missing real estate prices and long-term interest rate opportunities they shouldn't.

Doug Lebda, founder and chief executive of LendingTree, the online site that allows banks to make competing offers to applicants, believes that "the fear of being rejected" because they don't conform to standards that may not even exist is keeping qualified applicants on the sidelines for no reason.

For example, what's needed for an acceptable down payment? Is it 20%, 10%, less? Yes, it's less — and potentially a lot less if you qualify for the right program. The widespread erroneous assumption that banks require a minimum 20% for conventional loans may have arisen from heavy media coverage this spring and summer of a controversial proposal by federal agencies calling for borrowers to put down that much if they want to get the best interest rates and lowest fees.

Also contributing to incorrect beliefs about down payments: The Obama administration floated the idea of a phased-in move to 10% upfront cash for all loans eligible for purchase by mortgage giants Fannie Mae and Freddie Mac, which together dominate the conventional home-loan sector. But neither the 20% nor the 10% plan has been adopted and the odds of either moving forward in 2012 are remote. Fannie Mae's and Freddie Mac's standard minimums remain 5% with mandatory mortgage insurance coverage.

If you have little or no cash to put down, there are multiple options: The Federal Housing Administration requires just 3.5% down on its insured mortgages. Other programs let you go to zero — even finance more than the price on the house when fees are rolled into the mortgage — provided you fit into an eligibility niche. If you qualify as a veteran or active member of the military, you can get a zero-down Veterans Affairs-guaranteed mortgage. Plus the VA allows your seller to pay your loan fees and closing costs provided that they don't exceed 6% of the house price.

You can also buy with nothing down if you are purchasing a home in any of the many communities around the country eligible for rural (U.S. Department of Agriculture) guaranteed mortgages. Though the property may be located on the outskirts of a large metropolitan area and might not strike you as particularly "rural," if the local population is below roughly 20,000 there's a decent chance you're eligible. The little-publicized USDA guaranteed home loan program, by the way, is booming. In the last fiscal year alone, according to housing administrator Tammye Trevino, more than 130,000 borrowers received low- or no-down-payment guaranteed mortgages — quadruple the number of loans extended as recently as 2006.

What about credit? Haven't lenders been pushing up minimum FICO scores into the mid-700s and rejecting applications with lower scores outright? Not everywhere. Though most lenders doing FHA loans require 620 to 640 scores to get you in the door, a few of the biggest FHA originators, such as Quicken Loans, will accept scores down to 580. Bob Walters, Quicken's chief economist, says underwriters scrutinize low FICO applications extra carefully but are seeing good to excellent performance from them: Not one has gone seriously delinquent this year.

And how about debt-to-income ratios? Aren't they tighter than ever? Not really. Lenders say that when loan applications go through the "automated underwriting" systems used by Fannie, Freddie and FHA, borrowers with high total monthly debt levels of 45% to 55% of household income — well beyond the posted limits — frequently get approved if they have positive compensating information elsewhere in the application.

Bottom line: Don't assume you can't qualify for a mortgage in 2012. Talk to lenders and seek out loan products that offer flexibility where you need it. You just might be surprised.